By Babajide Komolafe

Financial experts have predicted year 2015 to be a year of crises, risks and opportunities mixed together. While there is consensus on the 2015 election and crude oil prices as major risks for the economy in the new year, there is however divergent opinions on the direction of monetary policy and exchange rate of the naira. Their views on wide ranging economic and banking issues are presented below.

1. FACTORS THAT WILL SHAPE THE ECONOMY

Taiwo Oyedele, Partner, Head of Tax & Regulatory Services, PwC

In Nigeria, clearly the 2015 elections will have a major impact in shaping the economy from business confidence to employment generation, capital market growth, monetary and fiscal policies among others.

 Financial Derivative Analysts

Our findings reveal that the Nigerian macroeconomic environment will continue to be vulnerable to exogenous shocks in 2015. This is mainly because oil prices and international capital flows will continue to be dominant features in the Nigerian macro- economic equation.

In addition to the global oil market dynamics, the prospects of the Nigerian economy in 2015 hinges on the electoral calendar. Consequently, the above outlooks on the macroeconomic indicators are likely to change significantly depending on the outcome of the general elections.

Victor Ogiemwonyin, Managing Director/Chief Executive, Partnership Investment Company Plc

2015 will be a crisis management year with plenty of risks and opportunities. The biggest risk in the environment will be the coming elections. The economy will also be challenged because of the falling oil prices. The final risk factor will be the insurgency/insecurity, and how we manage it going forward. Any of these factors can have major impact for the country and the economy. A smooth election will immediately spark economic recovery with those betting on the opportunities, and all the dislocation it has brought with it, being the big winners.  A bad election will be hard to overcome quickly especially in a bad economy. The discontent around us will be a very dangerous factor in the mix.

Razia Khan, Managing Director/Head, Africa Macro, Global Research, Standard Chartered

Politics Elections, due in February 2015, are the key risk event. The powers of incumbency are likely to favour the ruling People’s Democratic Party (PDP). Unlike previous elections, however, it is not clear how much uncertainty will subside post-election. Evidence of a deeper north-south divide in the country, with little attempt to steer away from more divisive rhetoric, is likely to raise the political temperature. Independent studies suggest that only four of Nigeria’s 36 states may be spared some level of political violence. With little evidence that the authorities are able to curb the worsening Boko Haram insurgency, security fears in the north may discourage a high voter turnout.

Samuel Durojaiye, President, Finance Houses Association of Nigeria (FHAN)

The outlook for the Nigerian economy is not different from that of the global economy. If you look at what is happening to resource prices, and that includes our crude oil, prices have come down by over 40 percent. Crude oil is now selling around $60 per barrel and sometimes below $60. When we had our budget at $78 we still found it difficult and had to cover up with about N1.1 trillion in loans. Now that oil price has gone down to $60, you have a situation where, if we are not careful there won’t be anything for capital expenditure, because 75 percent or 70 percent of our earnings is going into recurrent expenses. So you will find out that if we are not careful, the entire budget or revenue might just go into recurrent expenditure and there won’t be anything to meet capital expenditure.

Some states have over bloated their workforce when revenue was very good. Now they would have problem paying these salaries. The Labour is already saying it would not allow retrenchment. Some states now have not even paid November salary fully not to talk of December and the revenue coming in January would even be lower than what they distributed in November, except they want to clear the excess crude account.

 Kunle Ezun, Economic and Research Analyst

There is problem with the assumptions guiding the budgets. Yes the crude price benchmark has actually been reduced to $65 per barrel. But how feasible is this? Given expert view that crude oil price might bottom out at $45 or $50 per barrel. Even now oil is going for around $60 to $61. If you now put the global demand and supply dynamics into perspective, the price may actually be hovering around a maximum of $55. This means that the issue of Excess Crude Account or accretion to the reserves will be minus. So that is a major issue. Then again is the issue of the exchange rate being set at N165 to the dollar, even when the CBN has moved the mid- point to N168, it shows a major disconnect between the CBN as the monetary authorities and the fiscal authorities. There should have been input from CBN into that budget. If you put that into context, and now plug in the growth outlook, the government has said they are looking at five percent, which I actually agree with them. But they have not come out to tell us what will actually drive the growth to achieve 5 percent.

Also election is coming up. If the election produces a new government, there is going to be a stop gap hence the whole outlook is going to change, especially in terms of personnel, processes, which may affect everything that has been put in place for 2015.

I see a lot of issues around the election. If the election produces a new government, we would have to go back to the drawing board and change our permutations.

If this government continues and the outlook for the oil price works out, a lot of this state government will not be able to pay salaries, as a result we might see in our hands social unrest.

 Harrison Owoh, Managing Director/Chief Executive, H.J Trust BDC

I see a bright outlook for the economy in 2015 because there is definitely going to be changes both in the administration and in the management of the economy. Also for banks, there is going to be reforms, and also in the capital market. So there is a bright outlook, you know in Nigeria we know how to correct our short comings.

1. MONETERY POLICY

Taiwo Oyedele

I believe the major reason for the recent tightening was the fear of inflation in view of the naira devaluation given that Nigeria is heavily import dependent. Fortunately, inflation rate has been stable and in fact eased from 8.1 percent in October to 7.9 percent in November 2014 according to the National Bureau of Statistics. This is due in part to more local production of food but also because the falling crude oil prices is helping many countries reduce their production costs and hence lower their prices which partly offsets the exchange rate induced higher import costs into Nigeria. Given that inflation is not likely to be such a problem as earlier envisaged, I do not expect more tightening in 2015. In fact, I would expect a loose, more relaxed, monetary policy in 2015 because of the negative impact of tightening on interest rate which dampens economic activities from capital market decline to high cost of doing business especially for manufacturers, SMEs and agricultural businesses.

Just to point out also that a tight monetary policy puts a strain on government in form of higher debt service burden. Even though Nigeria’s overall debt to GDP ratio of 13 percent is well below the global benchmark, it is a source of concern to see that debt service to projected government revenue for 2015 is about 26 percent.

Put differently, we will spend about a quarter of our earnings (943 billion) to service debt, much more than the entire budget for capital expenditure of N633 billion. In my view this is the true measure of Nigeria’s debt burden and a reflection of our capacity or lack thereof to increase borrowing. We really cannot compare ourselves with many countries who borrow at close to 0 percent interest rate only on the basis of their debt to GDP ratios.

Financial Derivative

The contractionary monetary policy environment is expected to remain in 2015 but with limited appetite to tighten further. As a result, money market rates are expected to fluctuate between 9 percent and 14 percent   in 2015. However, market liquidity will remain the underlining factor influencing money market rates. Hence, it is expected that there would be frequent CBN interventions to maintain a relatively stable liquidity position. Furthermore, likely increase in the US and euro area interest rates will increase the level of capital flow reversal leading to tighter monetary policy measures.

 Ogiemwonyin

Tightening was needed to signal a new regime of tighter monetary policy. Luckily, we have not seen a hike yet in inflation. Inflation is currently at 7.9 percent and expected to be stable for the first quarter until higher foreign exchange rates work its way into inflation during the year. On the other hand, election spending might be such that will force the CBN to hike rates to slow inflation, and not a reaction to naira devaluation.

A further tightening will have significant effect on the financial markets as assets adjust to new prices and available liquidity dry up. The growth forecast of 5.5 percent will definitely not be realized. Any tightening will be for a short time though, and re-inflation of the economy will follow immediately after the elections.

Razia Khan

We forecast further tightening by the CBN, including an additional 100bps hike in its monetary policy rate (MPR) to 14 percent in March 2015. This is unlikely to prevent inflation rising to double digits by second quarter of 2015. We forecast that inflation will remain in low double digits until second quarter of 2016.

 Durojaiye

The monetary policy of the CBN would be so tight. CBN has already given us sample of what to expect, and because of what is happening, interest rates have gone up to about 30 percent now. For prime lenders some banks are charging 25 to 27 percent. So the average man will be getting interest rate of 30 percent average and above.

Harrison Owoh

There is going to be a relaxation of the monetary policy to enable banks lend to the real sector like agriculture, infrastructure, SMEs.

1. EXCHANGE RATE

Taiwo Oyedele

I think it is a difficult balancing act of keeping many balls in air at the same time. The reality is that the CBN as a matter of necessity must continue to defend the naira. The key issue is what should be a realistic exchange rate band. For the 2014 budget, government estimated the mid-point exchange rate at N160 to the dollar with a benchmark price of $77.5 per barrel of crude oil. The average crude price for the entire 2014 is still above $80 yet the CBN could no longer defend the exchange rate and this calls to question whether the exchange rate was realistic in the first place. This can only be partly explained by the less than budgeted volume of crude production. For 2015, we see that the federal government used a rate of N165 for the 2015 budget even though the CBN has earlier devalued the naira to N168. The forecast in the international market for crude oil prices in 2015 is somewhere around $60 to $70. I therefore do not see how we can defend the naira to be anywhere around N165 or N168 in 2015.

 Financial Derivative Analysts

The parallel market rate is expected to cross N200/$ as dollar demand pressure persists. A N200 exchange rate is only a 15 percent adjustment as against 45 percent devaluation in 2009. Although, projecting the value of naira is currently clouded by several domestic and exogenous factors, the fair value of the currency is expected to be between N180/$ and N195/$ at the interbank market. The naira adjustment by the CBN is timely and the depreciation of the naira has reduced over time because the official rate is closer to equilibrium. A further depreciation of 3-5 percent is also expected at the official market. This is due to anticipated impact of the global oil market spiral on external and fiscal buffers which limits the central bank’s ability to support naira.

 Ogiemwonyin

Foreign Investors making their exits are already gone. I expect the Naira will most likely settle around the N180 to N200 to the dollar range. Devaluation beyond this range is not envisaged unless the election crisis becomes unmanageable.

The oil prices will settle around the $60 per barrel mark and the slide in the naira value will slow. The naira should be allowed a value within the band currently set and adjusted quickly to avoid massive devaluation that comes with waiting to take a decision, and making it an event when we then devalue.

Razia Khan

Despite recent monetary tightening by the Central Bank of Nigeria (CBN), the naira exchange rate will remain vulnerable to weaker oil prices. We forecast a high in dollar exchange rate of N190/$ in first quarter, reflecting investor concern around weaker oil prices as well as the elections.

Durojaiye

It is a very tough situation. Now two things work together, the rate of interest and the value of your currency. CBN does not want to allow the currency to find its level. If you protect the value of the currency, you cannot protect the interest rate at the same time. So there must be a balance. And in balancing, you have to ask yourself, where is your revenue coming from, and you cannot balance what you don’t have. If the revenue is not coming in, it would be difficult to allow the naira go to N300 or N400 per dollar. So the CBN will still want to protect the naira to some extent. It would allow interest rate to go up, to discourage people from borrowing to invest in foreign exchange. It is a tight situation.

Kunle Ezun

A lot of people actually see the naira further devalued. But for me I don’t think so. I think what we have today will be maintained. Maybe we may continue to see naira at N185 or N180, but I don’t think the CBN will further devalue the naira. Even in 2009 when oil went to $30 we only had devaluation once. Because when you devalue twice in six months, you are sending a wrong signal. You are saying your first devaluation was not done correctly. Because it is expected that when you devalue the first time, you should have taken into consideration that there might be further drop in oil price and do a holistic devaluation. So if the CBN devalues again, it will send a wrong signal about our economy. So I think the CBN will continue to manage the naira outlook, through the managed float, which allows them to come into the market weekly to moderate the exchange rate.

1. BANKING AND FINANCE

Kunle Ezun

Most of the banks actually make their money from government securities, from investment incomes, so their income will be determined by how much government borrows in 2015 and the outlook for the monetary policy. If the budget is running into deficit, the government will fall back on the banks to finance the deficit; it means they will borrow at high rate. So a lot of banks will continue to do more of investment in government securities than lending to real sector. The real sector needs more of intervention funds because I don’t see any of these banks lending to the real sector, because the outlook does not support banks lending to the real sector. As at today, the power generation has dropped to 2,900 MW, and most of the businesses hardly survive on their own. So the banks will play safe in 2015, and it means that it would pay them to continue to invest in government securities which are more like a risk free instruments.

Durojaiye

For the Finance Houses subsector, 2015 is going to be very tough because apart from interest rate going up, your borrowers, people who take local purchasing orders (LPO) at margin of 20 percent and they are taking the loans for three months. How would they pay? If you increase your interest rate, and somebody has 20 percent on the LPO, and don’t forget that most companies might not be able to sell according to their budget; they will not be able to increase price. They will want to reduce cost, so the man might not have a margin of 20 percent. So how does he pay back the loan he has borrowed? There would actually be delayed in repayment.

1. INFLATION

Financial Derivatives

The headline inflation is expected to range between 10 percent and 12 percent in 2015. In a highly import dependent economy, some of the price effects of the devaluation will be passed to the consumer. This is based on the persistent decline in global food, energy and other imported goods and services prices. Although the devaluation of the naira is expected to increase inflation as a result of the pass-through effects on import costs, this impact is likely to be muted due to the lower global commodity prices and anticipated increase in local production of staple food crops. However, there is a marginal probability that inflation would temporarily spike above 9 percent due to the increase in electricity tariff, speculative trading around the elections and other policy developments.